2 Main Secrets of Deal Sourcing to Find the Right Business to Buy in 2024

Hey guys, Mubarak Shah here, MNACPA, and today I want to talk about the best practices for deal sourcing for your MNA deal, whether you're a traditional searcher, self-funded searcher, independent sponsor, lower middle market private equity, corp dev person. You know, these are the two key methods and ultimate strategies that you have to have when you're doing effective deal sourcing in MNA. And so I want to talk about both of them and kind of go into details about them. All right.

I think everyone knows or, you know, if you're new to this, then this will be helpful. And we'll go into some tactical approaches to and kind of actual strategy. But ultimately, you need to make sure you always have two key methodologies. Right.

It's your on market deal sourcing. Right. Things like the biz buy sell, the popular platforms, the online deal marketplaces, you know, working with business brokers, M&A advisors, things of that nature, potentially investment banks. depending on the size of your deal.

But then you also need to do off-market deal sourcing strategies. All right. And so we're going to talk about that, how to actually do that. You know, so sure, there's word of mouth and LinkedIn posting, but there's actual strategies that I can talk about.

And we'll talk about the tech stack as well. But I first want to target, you know, on-market deal sourcing tactics because there's so much here. And obviously, you know, the first step of all of this is really identifying your buy box right so anytime we work with clients on deal sourcing and you know feel free to reach out put our email in the description and you can reach out if you have any questions on or need some help with deal sourcing but the first thing is obviously your buy box right so there's a few key components right we're gonna just limit this to the united states for now because that's where we work but in general if you were to do this anywhere in a different country you know you could do that as well.

So you need to limit yourself down to your location, right? So some self-funded searchers or new MBAs or people that have a bit more flexibility, they're able to go through the whole US and that makes it very strategic. But usually you want to lock in on a couple of states, maybe around where you live, things of that nature. Then there's obviously the industry.

And so sometimes people say they're industry agnostic. I don't know if that's the smartest move. I mean, even if you don't have a strong thesis or a strong strategic background, you should have at least a few different industries, right? So like, I mean, I'm a CPA, we're buying CPA firms, that's obviously makes sense.

But then there's a few other industries that I've had exposure to that I've had some interest in as well, right? You know, home healthcare, depending on the type of business, because each business has different nuances, right? So within even home healthcare, for example, There's private pay, there's health insurance reimbursement with Medicare, there's CDPAP in New York, there's senior residential assisted living, which is very interesting, but it's kind of a hybrid real estate play and has caps on revenue, right?

So the reason you should identify two or three different industries is just because you can start to learn more about how that industry grows. And you really need to have an industry thesis, right? there's no point in doing this unless you feel like you're going to be able to make it worth your while and that usually means some type of financial thesis of an exit you know five years down the line seven years ten years or building a hold co that's a whole nother topic that we'll talk about in a future episode but in general a lot of times you know i think i i advise our clients to think about how can you reach a triple your current acquisition.

Like if you're buying a $1 million company, how can you get to $3 million in five years, right? Pretty aggressive, but that's kind of the original structure and kind of the thought exercise you need to go into because then it teaches you how to look at the business and how to filter through potential deals and potential sims because you're going to see a lot, right? So just to kind of put the numbers out there, on average you probably like one deal out of every 100 that you look at right And I talking about even skimming through a biz buy sell or biz quest or merger network things of that nature um and then there's so many you know we actually have you can email us we have a resource of about 200 different broker platforms um broker networks or kind of like online marketplaces because yes you have biz buy sell and biz quest and you have kumo and these deal aggregators but but there's so many just smaller brokerage houses, business brokerage houses and lower middle market investment banks that don't link up their deals to a single source.

And so a lot of times, like for example, buying accounting firms, right? You're going to have some accounting firms on your biz buy sell, but then you have accountingpracticesales.com and you have accountingpracticesales.net and you have the POE group, right?

which is a big group advisor in the CPA firm. And then so you have a few, basically every industry will have its own set of specialized brokers that are focused on that specific industry. So that's something that once you identify your industries and you're thinking about your buy box, you can start identifying because, you know, I think some people treat biz by sell like the way some home, you know, people into real estate look at Zillow or LoopNet and they just like to skim it and look at listings.

But once you actually identify your target industries, you know, I think you should probably have two primary ones and maybe one tertiary. Right. You can be industry agnostic, but it really doesn't make sense. I mean, you need to have some type of historical knowledge or at least start doing research into industries.

Because, again, going back to what I was saying a minute ago, you should be able to identify how you're going to triple that business and how you're going to have a successful exit. Because if you don't have a specific strategy that really drives you to a business, you're not going to have proper direction. And what I mean by that is, you know, every business is going to have its issues. A lot of newer people to the space just think that they can buy a business.

It's going to go up and to the right and that they can do it while having a job. And that's not realistic, unfortunately. Like those days are pretty much gone. If you don't have a specific industry thesis, then you're not going to be able to make your work.

So, for example, I'm interested in buying CPA firms because I have a very strong labor arbitrage and outsourcing talent pool that I've trained and refined over the last decade. And so I know that I can go in and buy a CPA firm that's paying U.S. salaries to people, you know, high six or low six figure salaries to people that are doing basic data entry for like, you know, the zero to 80 percent of the work of a tax return or the basic bookkeeping.

Right. Obviously, some there's some high level thought and high level strategy that you need an experienced person for. But if you're having them, you know, scanning in documents and organizing files and doing basic data entry into the tax software that can be outsourced. So my arbitrage opportunity is that I can come in and cut the labor and payroll for fees or costs or expenses within a CPA firm by about 50 percent or at least a third.

And so that automatically gives me my thesis, right? So not only do I have a cost-cutting thesis, right? And I'm just giving this as an example so that way when you're looking and thinking about your buy box and your kind of deal sourcing strategy, you know how to hone in on your industries. and so the other focus is on the concept of the the sorry I just lost my train of thought but the other concept is the focus on being able to figure out how are you going to boost the revenue right so for example CPA firms right they're not CPA firms are very sticky even though you probably hate your accountant they probably take a while to respond to you you're not going to shift your accountant, right?

You're going to probably stick to your accountant and you're going to be, you know, you're only having to deal with them once a year for your tax return. Maybe more if you have a business and you're doing your bookkeeping, but that's a whole other kind of type of CPA that you might hire But in general a CPA firm through revenue growth will actually not really grow that much through like organic or paid advertising right The real strategy to if I was to get into the CPA firm business and expand that I would buy other books of business right smaller books of business by one CPA, two CPAs or two accountants that, you know, have maybe 500k or a million in revenue by their book of business and basically shed the staff and have my team that's outsourced handle it.

So I have my revenue growth built in and I have my expense cutting, right? So that's how you have to hone in on your industry thesis. All right. So that's how you kind of set up your on-market deal sourcing tactics.

And that's what you'll do in the daytime. And And that's what you'll, you know, have your connections with your business brokers and coming out professional. And there's more details. I think, you know, just talking about it now, I think I'm going to have to hone in and make another episode on specifically about how to deal with business brokers.

And I had an episode a few episodes back that talks about that. But that's there's a key way that you can leverage business brokers. I mean, I know for some reason, a lot of people in the M&A space think that like, oh, they're the gatekeepers or they're just the people you have to trick and get through to get to the seller. But honestly, working with the right broker and having them as your friend can be an amazing leverage point.

Because now today we have brokers that just bring us deals that we can then forward to our clients and kind of be the middleman and dealmaker very easily in that fashion. So that's the on market, right? But where the real kind of gold and kind of double-edged sword is, is the off market or what people refer to as proprietary deal sourcing strategies, right? So anybody that has an enterprise sales background or a software sales background will know how to do this strategy and know how to build the tech stack required to be able to do off market or outbound emails and cold calling and direct mail campaigns.

but before we get into that you know i wanted to make sure that you have your three main buy box criterias which was first was location right second is the industries and then the last one is like the EBITDA range all right so the reason that's important is because you know i think it might be a little bit more common perception now but you don't want to necessarily buy too small or buy a business without enough EBITDA where you're basically buying yourself a job right And that can be different depending on your own personal needs, right?

If you just want to make sure you're not starting from scratch and be able to kind of get into something without a lot of money down and without having to take a lot of debt on your name. Because in the prior episode, we did an episode on how to raise funds for M&A acquisition. So go check that out. But if you don't want to necessarily raise too much debt and you're kind of exploring and making sure that your thesis overall works, like what we're doing with our initial acquisition of a CPA firm.

we're buying smaller than usual just to make sure that our thesis actually complies. And then we know that we can buy more and add on, kind of have our initial mini platform to kind of tack on new acquisitions for. But the off-market deal sourcing strategies, the way that they'll work is that you'll end up using a few different kind of platforms because basically what you're doing is that you're generating a list of leads or contacts, which means that you need their email information you need their phone numbers and there's a few different softwares to do this right there's hunter.

io there's luscha which is pretty cheap it's about 50 bucks a month there's some on the higher end of the scale which is like zoom info which is a few thousand a month or grata.com which is like 15 000 annually and that's where you can get all the company information and you know you set up the filters right so you have your location you have your industry you can kind of apply different filters like how many employees the company has the employee growth rate if you want to buy a faster-growing company you can kind of filter it by revenue and none of this information is going to be exact right a lot of data sometimes get outdated but you can you know with zoom info you can actually approximate and kind of pull in levers that tell you how accurate the data is there also sales intel there apollo that also like 50 to 100 bucks a month and so you use these platforms to get the contact information and then you basically set up a direct outreach campaign and it's not that difficult you know it's not something that you have to just sit there and do one by one though now with some recent kind of google spam filters and stuff There are important caveats there.

And I'll set up an episode where I talk about the specifics there of how to set up the tech stack required for proprietary deal sourcing and outsourcing. But you need to run these kind of in tandem, right? Because the on-market deal sourcing strategies with the biz buy sell and the business brokers, that's great. But you'll see pretty soon after you've kind of done that for about a few weeks or a month and you're pretty targeted in your criteria that you're going to, quote unquote, not necessarily run out of opportunities, but it's not something that's getting updated every day and you're competing with a large pool of people, right?

There's much less people doing off-market deal sourcing strategies, and it requires a bit more time and work and effort to figure that out. But nowadays with the new technologies coming into play and kind of all the data there, you can basically create a CRM and a funnel where you can kind of start reaching out to all of these people on a high level and then do maybe some more effective cold calling um and so we can talk about different scripts different templates but ultimately the funnel looks like okay if you're going to look at 100 deals you might find find like five that you like um and then you'll have to kind of reach out get the nda get the sim get the financials right you probably won't get the tax returns until post loi or post seller call so be prepared that this process takes a few months and actually sometimes depending on if you're being very picky about the business you're trying to buy they can take a few years even right like for example there's some i'm local here in charlotte so i won't name them but there's local kind of traditional search funds where they build their thesis is that hey buy a business that a monkey can run that it's super effective it's super sticky and they'll spend two years or more even just looking for the right business because and this is kind of the warren buffett approach too which is you know buy a business that's so simple that anyone can run it or quote-unquote i think warren buffett's a bit more kind of uh negative on this but he's like buy a business that even dummies can run and it'll be profitable because soon you know one day but dummies will be running it so in general the thesis there is that you buy a business that actually does fit the the normal kind of concept that i think a lot of people that are mbas or that haven't actually done entrepreneurship before and haven't run a business before think is the case, which isn't the case for 95% of businesses.

I mean, there's probably today only 1% of businesses out there. And they're probably like, think Google, right, where you can basically just, you know, have ineffective management. I'm not saying that they do, but I'm just saying that this product sells itself. For 99% of other businesses, especially in these kind of quote unquote boring businesses that don't have a monopoly and that you're competing with local forces, you will need a competent management team and you will need to actually put in day-to-day effort.

And it's not something that's simple. You will be working more than you did in your day job. You will have better economics and better benefits of it, but it's not a 40-hour work week. It's not something that you can just turn off on the weekends and holidays.

When you switch from a 9-to-5 or from a normal day-to-day W-2 job into owning a business, there's extremely different ramifications and so I just wanted to put that out there I know I got a little bit off track but hopefully that helps just kind of strategize the two high level on market and off market deal sourcing strategies but I'll follow this up with kind of more specific details on the tech stack and different ways that you can follow this up so hope that helped if you guys enjoyed this feel free to reach out to us you can reach me at mubarak at dealmaven.